Securing a hard money loan involves a set of terms and conditions that both the borrower and the lender must agree upon. These terms are often more flexible than traditional loans, but they typically come with higher interest rates and shorter repayment periods. Below are the key terms and conditions commonly associated with hard money lenders loan:
- Loan Amount:
The principal amount that the hard money lender is willing to provide to the borrower. This amount is typically a percentage of the property’s value, known as the loan-to-value (LTV) ratio.
- Interest Rate:
The interest rate is typically higher than conventional loans, often ranging from 7% to 15% or more. The rate can be fixed or variable, and it is a significant factor in the overall cost of the loan.
- Loan Term:
Hard money loans have shorter terms, usually ranging from 6 months to 3 years. Some lenders may offer extensions, but this often comes with additional costs.
- Loan-to-Value (LTV) Ratio:
The LTV ratio determines how much of the property’s appraised value the lender is willing to finance. Typical LTV ratios range from 50% to 70% or even higher in some cases.
- Repayment Structure:
Monthly payments are common, but some hard money loans may require interest-only payments during the term, with a balloon payment of the principal at the end.
- Down Payment:
Borrowers may be required to make a significant down payment or equity contribution when obtaining a hard money loan. This ensures their financial commitment to the project.
- Loan Origination Fee:
A one-time fee charged by the hard money lender for processing and funding the loan. It is typically a percentage of the loan amount.
- Prepayment Penalties:
Some hard money lenders may impose penalties for repaying the loan early. Borrowers should be aware of these terms and conditions and negotiate them if possible.
The property being financed serves as collateral for the loan. If the borrower defaults, the lender can take possession of the property through foreclosure.
- Personal Guarantee:
In some cases, the lender may require a personal guarantee from the borrower, making the borrower personally liable for the loan.
- Exit Strategy:
Borrowers are often required to have a clear and viable exit strategy to repay the loan, such as selling the property, refinancing with a conventional loan, or using other funds.
Before entering into a hard money lenders agreement, borrowers should carefully review the terms and conditions, seek legal counsel if necessary, and ensure they fully understand the terms, repayment schedule, and potential risks associated with hard money lending. It’s also important to choose a reputable and transparent hard money lender to ensure a smooth and fair lending process.